MOSCOW BLOG: The Kremlin's PR incompetence

By bne IntelliNewsJune 26, 2013

bne -

Russia has just hosted its premier investment summit, the St Petersburg International Economic Forum (SPIEF) on June 20-22, which is supposed to showcase the country and attract badly needed foreign investment. Instead, thanks to the Kremlin's typically moronic handling of its PR, it only managed to make Russia look like a prickly and extremely bad-tempered bear.

Russia is at the bottom of international popularity stakes after a series of political and economic gaffes. The Kremlin has chosen to come down hard on the nascent opposition that has generated reams of negative headlines. And then National Security Agency whistleblower Edward Snowden flew to Moscow on June 23, incensing US politicians still further. On June 25, President Vladimir Putin confirmed Snowden is still in the transit area at Moscow airport and vowed that Moscow would not extradite the whistleblower to the US.

At the same time, the failure to carry out structural reforms during the boom years of the noughties has come back to bite after the economy shuddered to a halt this spring. The bond market has been doing well, but this has more to do with the US Federal Reserve handing out free money than anything Russia has done. The Russian equity market on the other hand has tanked and the RTS Index is currently trading at 1,255, below the 1,445 that it finished at after the worst crisis year of 2009.

Rude to the guests

The rest of the world hates Russia these days. And that was apparent from the thin crowds strolling about at Lenexpo where SPIEF was held. Apart from the Russian elite and the foreign "lifers" who have made their entire career in Russia - including this correspondent - there were very few outsiders come for a look-see. Indeed, these outsiders are more-or-less excluded from the forum, but more about that in a moment.

So it was small coup to get German Chancellor Angela Merkel to attend the forum as the star guest this year - easily Russia's best friend in Europe.

Despite Russia's horrible international image, nasty domestic politics and caustic operating environment, the Germans are about the only Western Europeans that "get it" about investing in Russia: it is really hard work, but it is really, really profitable if you can make it work. Indeed, a study from investment bank Aton Capital released earlier this year found that while Russia has one of the lowest levels of foreign direct investment (FDI) of any of the emerging markets, it also has the most profitable investments. Most of Germany's top retailers like Media Markt, Obi and Metro are already well established in Russia, and they are all reinvesting every kopek they make here in expansion.

Russo-German trade has soared to over $80bn a year (just behind Russia's biggest trade partner and new best friend China) and the two countries have clinched what is the geopolitical equivalent of marriage after the Nord Stream gas pipeline went online in November 2011. More than 6,500 German companies have opened their doors in Russia, ten-times as many as from the UK, making Germany by far the biggest of Russia's "real" foreign investors.

It should have been a Russo-German love-fest and a celebration of the deep and enduring ties being built between the two countries. Instead, it was a near disaster.

Merkel very nearly turned her plane around in the last hour before arriving at Pulkovo airport and only a fast phone call between the two leaders averted what would have been a very embarrassing cancelation.

What went wrong? Merkel made a stand on human rights issues and the jailing of opposition figures? Russian President Vladimir Putin was enraged by some EU demand on liberating Russian energy deliveries? Both are tricky points in Russo-German relations.

No. The problem was the Kremlin refused to meet the press after the two leaders were due to inspect the "Bronze Age of Europe - Europe Without Borders" art exhibition at the Hermitage museum. The exhibition includes some so-called "trophy art," or art that was carried home from Germany by Russian soldiers at the end of the World War II.

Trophy art has been a touchy subject since 1991, but the two sides have come to a working relationship on the question that has allowed the exhibition to go ahead. The problem was not going to see the art itself, but that the chancellor was going to mention the fact that international law says the art should be handed back to Germany eventually, which the Kremlin refused point blank to allow in front of the press.

In short, this was not an entirely meaningless, but nonetheless silly, argument only a few hours before the two of them were supposed to take the stage together and sell Russia to the world. Merkel seemed extremely grumpy during her speech, but managed to avoid all the red-letter issues, sticking to bland economic and investment themes in her speech.

Why does the Kremlin always do this? The Kremlin rolls from one PR disaster to the next. "We want to attract foreign investment as a top priority" is the current mantra, but when state-owned oil company Rosneft bought privately owned British-Russian joint venture TNK-BP the first thing Rosneft CEO Igor Sechin did was screw over the minority shareholders and wipe 40% off TNK-BP's stock price, rather than share some of the company's cash pile.

Liberal economist and chief Kremlin ideologue Sergei Guriev has been a regular fixture at SPIEF and wrote Prime Minister Dmitry Medvedev's speech in 2011 that re-launched Russia's privatization drive. But he was painfully absent this year, having fled into exile last month after being questioned by police. When asked about the affair, Putin retorted, "who's he" - an insanely unbelievable denial that has been widely mocked.

The Germans may get it when it comes to Russia, but the Kremlin is turning itself into a laughing stock with this sort of public relations. The whole setup at SPIEF is a testament to the problem.

Arrogance

Last year Putin kept the delegates - aka the money that Russia is trying to attract - waiting for over an hour, sweating in the hall while the poor moderators ad-libbed to pass the time. This year delegates joked about not drinking too much water before you go in to the hall and the journalists opened a book on how late Putin would be. As it turned out he started speaking only 11 minutes behind schedule, but that probably has more to do with Merkel imposing some Teutonic discipline on his schedule as she came straight from the airport to the podium.

Putin's regular tardiness is symptomatic of a more general Kremlin arrogance when it comes to dealing with investors. Several people commented on the thinness of the crowd and reminisced about the golden days of the Russia Economic Forum that used to be held in London's QEII centre opposite Westminster Palace in the 1990s, at the time the premier investment conference. In the coffee hall of that (privately-run) conference, press, businessmen, oligarchs and ministers stood shoulder to shoulder and discussed the state of play. It was open to anyone and everyone who was curious about Russia, and gave them direct access to the movers and shakers.

SPIEF on the other hand is an elite club that does more to exclude people than invite them. The Kremlin was upset that Russia's premier event was not in Russia and basically shut REF down in 1997 - speakers like former Renaissance Capital CEO Stephen Jennings abruptly cancelled their appearance on the same day they were supposed to speak because they were told not to go.

The exclusivity of SPIEF was brought home to this correspondent because this year I was refused entry due to my application not being approved by the organising committee. As it turned out it was a bureaucratic mistake (it's my fourth time there and I was even on a panel last year). However, the girls at the help desk told me it was "impossible" to rectify the screw-up.

Of course it was not impossible and being an old Russia hand I knew the trick was to find the mobile number and name of the person who could push the "approved" button (in Russia the size of your Rolodex directory of mobile phone numbers is in direct proportion to your economic success). I even had to get through a new security check by the FSB - which was fair enough given Putin and Merkel were there - but ironically this was the one bit that was easy and only took half an hour (scary...), whereas the organising committee took more than five hours to undo their mistake - and even then only issued me with a pass for one, not three, days.

SPIEF is not an investment forum in the Roman sense of the word, where anyone can come and talk, but an investment club - and a very elite club at that.

The Kremlin thinks that investment will be won only by talking directly to the elites in the rest of the world. Last year, Goldman Sachs CEO Lloyd Blankfein was a prominent attendee (he didn't show this year) and the Kremlin has courted the US investment bank as the people that can bring in the cash. But while Goldman has been happy to take the half a million dollars a year fee it charges the Russia Direct Investment Fund (RDIF) to "promote Russia's image abroad," it has managed to do little else. (JP Morgan recently signed a similarly useless deal with the Russian finance ministry to "boost the country's credit rating and improve its image.")

Indeed, the whole idea of the RDIF belies this assumption that it is the elites who can turn Russia around. The fund has $10bn to play with and is supposed to reassure investors that their investment will be safe and profitable by co-investing with them. However, for "investors" read "elite investors," as those are the only people the fund is talking to.

And it is not working: the RDIF has not made any really significant investments other than buy a stake in the Moscow Exchange (which is one of the few investments non-elite investors would have been happy to make) and promising to build a few small power plants.

Just how wrong-headed this approach is becomes obvious if you turn the logic of the RDIF around: if you don't invest with the state-backed fund, you cannot be sure your investment will be either safe or profitable.

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